Justify the need for regulation of financial markets

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Presentation on theme: "Justify the need for regulation of financial markets"— Presentation transcript:

1 Justify the need for regulation of financial marketsMarket failure;when the market’s pricing mechanism is incapable of maintaining all the requirements of a competitive, efficient market.Regulation restricts financial institutions’ activities in the vital areas of lending, borrowing and funding.

2 What are the purposes of regulation?It prevents issuers of securities from defrauding investors;It promotes competition and fairness in trading;It promotes the stability of financial institutions;It restricts the activities of foreign concerns in domestic markets and institutions;It controls the level of economic activity.

3 What is disclosure regulation?It is the form of regulation that requires issuers of securities to make public a large amount of financial information to investors.This addresses the problem of asymmetric information and the problem of agency.

4 State two main acts which led to deregulation in the early 1980s.Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA);Garn-St. Germain Act of 1982.

5 Briefly identify main points of these acts. (DIDMCA)The Depository Institutions Deregulation and Monetary Control Act of 1980 phased out Regulation Q interest rate ceilings and expanded the asset and liability options for banks and thrifts.All depository institutions were allowed to offer interest-bearing checkable deposits;S&Ls and savings banks were allowed to make business loans.expanded the powers of the Fed by authorizing uniform and universal reserve requirements.

6 The Garn-St. Germain Depository Institutions Act of 1982allowed all depository institutions to offer money market deposit accounts, which had no interest rate ceilings;permitted limited check writing, and were fully insured up to $100,000;Super NOW accounts were authorized, which are checking accounts with a high minimum balance that pay a market interest rate.

7 Why does The Gramm-Leach-Bliley Act (GLBA) of 1999 take a special place in US regulation?The Gramm-Leach Bliley Act (GLBA) of 1999 allowed for bank holding companiesto be certified as financial holding companies (FHCs), which could engage in many previously barred activities, including securities underwriting and dealing, and insurance and merchant banking activities.The GLBA also allowed FHCs to engage in other financial activities and complementary nonfinancial activities.

8 Why does The Gramm-Leach-Bliley Act (GLBA) of 1999 take a special place in US regulation?Banks had previously found ways into the securities industry through bank holding company subsidiaries. They have been able to do this because the Fed had relaxed or weakened many of the provisions of Glass-Steagall Act.With the passage of the Gramm-Leach-Bliley Act (GLBA) in 1999, the final vestiges of the Glass-Steagall Act separating investment and commercial banking were removed.The stage was set for full financial integration of the banking, securities, and insurance industries.

9 Identify the major contractual-type Financial Intermediaries (FIs).Contractual-type FIs have liabilities that are defined by contract. They call for regular payments to be made to these FIs in exchange for future payments under specified conditions. (2 marks)

10 What are their main sources of funds (liabilities) and their main uses of funds (assets)? (FI)Three main types of contractual-type FIs are life insurance companies, pension funds, and property and casualty companies. (1 mark)Each taps different sources of funds and uses them to purchase different types of financial assets.Life insurance companies collect life insurance premium payments and use these funds to purchase corporate and foreign bonds, corporate equities, and other financial assets. (2 marks)

11 There is a trend toward greater integration of financial markets throughout the world. Provide three most likely causes that lead to this integration.The three strong arguments include:Deregulation and/or liberalization of financial markets to permit greater participants from other countries;Technological innovations to provide globally-available information and to speed transactions;Institutionalization – financial institutions are better to diversify portfolio and exploit mis-pricing than the individuals;

12 Compare briefly the use of securities in financial markets and indicate its significance to investors and borrowersMoney market and capital marketPrimary market and secondary marketDomestic market and secondary marketNational market and Euromarket

14 National market and EuromarketIn a national market, securities are traded in only one country and are subject to rules of that country;In the Euromarket, securities are issued outside the jurisdiction of any single country;Eurodollars are dollar-dominated financial instruments issued outside the US;For investors in Euromarkets the diversification is improved;Euromarkets are with little or no regulation for borrowers or investors - players are with good credit standings;

22 Which of the following is not one of the fundamental forces that have transformed modern financial markets and institutions?financial innovationderegulationdecreased competitionsecuritizationchanges in technologyAnswer: c

24 Which of the following is not a fundamental function of the Federal Reserve?Conduct the nation’s monetary policy.Provide an effective payments system.Regulate banking operations.Ensure bank profitability.All of the above are fundamental functions of the Federal Reserve.Answer: d

25 The reason some individual states restricted bank branching was to:encourage the formation of one-bank holding companies.prevent outside funds from financing community growth.prevent the formation of multi-bank holding companieshelp keep deposits in local communities.encourage diversification in local banks.Answer: d

26 A bank holding company’s income is derived from:dividends from bank subsidiaries.dividends from non-bank subsidiaries.interest from subsidiaries.All of the above.a. and c. only.Answer: d

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